IEM Traders See Rising Possibility of a Majority-Free Congress

Prices on the Iowa Electronic Markets (IEM) show traders believe a Republican takeover of Congress is the most likely outcome of this November’s elections, but they increasingly favor an outcome in which neither party controls a chamber.

As of Wednesday morning, the price of a contract representing a GOP sweep of the Senate and House of Representatives was selling for 58.7 cents on the IEM’s Congressional Control market, representing a 58.7 percent probability that Republicans control both houses.

The contract representing the status quo—a Republican House and Democratic Senate—was selling for 20 cents.

But the contract for “other,” which represents an outcome in which neither party controls at least one chamber outright, was selling for 12.2 cents, better than double the 6 cents it was trading for a month ago. While this may seem like traders believe a third party might win a chamber, Tom Rietz, an IEM researcher says that’s extremely unlikely. More likely, he says traders believe that independents in the Senate will make the difference.

“It means at least in one chamber, neither party has absolute control,” says Rietz, a finance professor in the Tippie College of Business. “For example, if the Senate ends up with one independent, 50 Republicans, 49 Democrats, and a Democratic vice presidency, then the ‘other’ outcome would hold because neither party has an absolute majority.”

Rietz noted that there are currently two independents in the Senate, and while one of them, Joe Lieberman of Connecticut, is not running for re-election, independent Angus King is leading in the polls to replace the retiring Republican Olympia Snowe of Maine. The other independent, Bernie Sanders of Vermont, is expected to win re-election. These two could form a two-person independent caucus that would hold the balance of power in a narrowly divided Senate.

“Right now, it looks like there may be two independents in the Senate, so an ‘other’ outcome is imaginable,” Rietz says.

Other prices on the Congressional Control market include 7.5 cents for a Democratic sweep and 1.7 cents for a Democratic House and GOP Senate.

A real money futures market operated by the University of Iowa’s Tippie College of Business, the IEM gives traders the opportunity to buy and sell contracts based on what they think the outcome of a future event will be.

Contracts for the correct outcome pay off at $1, all other contracts pay off at zero. As a result, the price of the contract at any given time is the probability that the traders believe that event will happen. Traders can invest up to $500 in the market. Check the IEM website for the latest Congressional Control market prices.